How Fracking Changed the Refining Landscape

Thayer Adsit
Jul 30, 2017 · 3 min read

Hydraulic fracturing has been employed for decades, but the application in horizontal drilling only became widespread around 2010. This technology shift has completely changed the refining landscape. The biggest fundamental shift has been related to natural gas. Prior to 2009, the price of natural gas and the price of crude oil were relatively correlated, but after 2009, the prices diverged:

Natural gas prices remained low despite a global recovery which restored the price of oil. There is no longer any definitive link between the price of domestic oil and the price of domestic gas:

This divergence between crude prices and natural gas prices was localized to the United States. This led to an enormous competitive advantage for the United States as the rest of the world’s prices between the 2011 and 2015:

This lower natural gas corresponds to lower electricity and energy costs for American manufacturers. The magnitude of this advantage is correlated with the price of crude. If global crude prices increase in the future, the United States refiners will be well positioned to reap rewards:

Energy costs are a refiner’s second largest expense and therefore lower energy costs are an enormous advantage. The largest expense for a refinery is crude oil though. Fracking also create a dramatic shift (albeit shortlived) in crude index prices, and has established longer term feedstock advantage for United States refineries. Brent crude is the index for international crude and WTI is the index for American crude. The majority of crude prices are based on these indices. Fracking caused the spread between the Brent index and the WTI index to increase substantially:

This meant that American refineries paid substantially less for crude over a 4 year period than their international counterparts. Although the indices appear to be equaled in the past year, American refiners are still at an advantage because of the differences in the transportation costs. Crude indexed on WTI crude is typically shipped via low cost pipelines, while crude indexed on Brent crude is typically shipped via expensive crude carriers. The products compete in the same markets so the product prices are relatively correlated. It is important to highlight and understand the advantages of fracking for American manufacturers. It is promoting industrial investment in a country with some of the strongest environmental regulations.

Thayer Adsit

Engineer at an international energy firm with experience in project, analyst, and manufacturing roles. Interested in data to unveil truths about energy.

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